To Buy Or Not To Buy How can you tell whether a stock is a good buy? Man cannot live on bread alone, and you cannot buy stocks on price alone. Not even on P/E ratio alone.				> Home > Glossary > Support
		Picking a winning stock involves a lot of research. The adage "buy what you know" makes a lot of sense. What does the company do? Does it have a solid market for its product? Is the company's management excellent, or at least competent? Does the company have a solid business plan, and does the market provide room for growth? These are but a few of the questions you should research.
		Additionally, there are ratios that analysts look at to glean useful information about where a company has been and where it is headed, financially speaking. It's a good idea to use these ratios when you screen for companies, in addition to your other research. You can find many stock screening programs online.
		Here's a rundown of the different ratios, and what they may reveal.
		Price-to-earnings ratio (P/E ratio) Probably the most commonly cited statistic, the price-to-earnings ratio divides the current price of a stock by the current earnings per share, or, sometimes, projected earnings. If the ratio is high it means that investors are willing to pay high prices for what they expect -- rightly or wrongly -- will be high future earnings.
		When looking at a company's P/E ratio you should find out whether it is based on current or projected earnings. Both are frequently used interchangeably. If it is based on projected earnings, keep in mind that it may be a less reliable indicator because actual earnings may not go that high (but also past earnings, as we know, are no guarantee of future ones).
		P/E ratios will be numbers such as 5, 32, 110, etc.
		Another key question in looking at P/E ratios is, what is high? P/E ratios went through the roof in 1998 and much of 1999, with many trading in the 100s.
		High P/E ratios also preceded the bear market of 1973-74. One company, Polaroid, was considered astronomically high at 93. Compare that with June 1999, when Hoover's online "stockscreener" listed 236 companies with P/E ratios above 100 -- with a few at 900 plus!
		However, with the bear market that began in 2000 many companies with high P/E ratios based on projected earnings saw their stock values tumble as those earnings failed to materialize.
		A good rule of thumb often cited is to measure the company's P/E ratio against the historic or projected growth rate. If the P/E ratio is more than double the growth rate, investors should be wary. But if it is below the growth rate, the stock could be a good deal.
		This is also called earnings multiple, market multiple, or, simply, multiple.
		Price-to-sales ratio (PSR) This ratio compares a company's price per share with its sales per share (or its market value with its total revenue). Analysts use this comparison to determine whether a stock is temporarily undervalued. A low PSR indicates that a company does have a market -- it is making significant sales -- and may only need to increase its margin in order for its stock price to take off. A "value" investor would probably give a certain amount of weight to this ratio.
		Price-to-sales ratios are used also for comparing companies that are in industries using high technology and are typically not making money, and therefore would have a negative P/E, which is hard to interpret.
		Price-to-book-value ratio (market-to-book) Stock indexes often use this ratio when classifying stocks in the "growth" or "value" category. This ratio compares the market price of a firm's common stock with the stock's book value per share (the value of a share based on the company's balance sheet rather than investor demand). A high ratio indicates that investors expect the company's earnings to grow and are willing to pay for that (growth stock). A low ratio shows that the solid balance sheet outweighs investor demand, and that the company could be a future winner (value stock).
		Debt/Equity ratio This compares how much a company owes (its debt) with how much the owners actually own (equity). A company with a high ratio has probably either financed its operations aggressively and/or suffered large losses in the past. This means it might be expected to have volatile earnings.
		Current ratio This ratio measures current assets divided by current liabilities, and is a good indicator of whether a company would be able to pay off all its bills at a moment's notice.
		Beta This is the measure of the volatility of a stock compared with the historical volatility of the S&P500. A highly volatile stock can bring potentially high returns but can also sink lower than a less volatile stock.

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